Opening up these sectors to foreign investment will help provide local companies much-needed capital in the wake of a slowing economy following sustained monetary tightening by the central bank to control inflation. Recently this year the government has moved a step closer to allow FDI in multi brand retailing in India after the Committee of Secretaries gave its nod to permit 51% of FDI in the sector. The recommendation will now head to the cabinet committee on economic affairs, which will take a final decision on rules to be imposed and the level of FDI to be allowed.
The government is likely to raise the limit of foreign direct investment in single-brand retail trading to 74% from 51% at present, even as it has plans to raise the limit to 100% in a phased manner. Also, government recommendations include making it mandatory for entities with FDI should source at least 30% of their requirements from the micro small and medium enterprises (MSME) sector. The Indian government is considering the minimum investment to be $100 million.
At present, India allows 51% FDI in single-brand retail and 100% in cash and carry format of the business. It is considering allowing 100% foreign investment in single-brand retail and opening up the multi-brand retail sector as well. While most foreign retailers may not jump in immediately after the liberalization of the FDI in multi-brand retails, the main players are definitely considering entry in India, two India-based industry bankers said. According to an inter-ministerial report, foreign retailers such as Wal- Mart (US), Metro (Germany), Tesco (UK), and Carrefour (France) favor unhindered entry into multi-brand retail.
Once the legislation is passed, major Japanese players in the convenience store segment such as Seven & I Holdings, Lawson and FamilyMart will also make a move to expand into India, a Tokyo-based banker said. The Indian retail industry is the 5th largest in the world. The size of the retail industry in India is around $590 billion as reported by Indian Council for Research on International Economic Relations (ICRIER). It is projected to grow at a pace of 20-30% annually and, is expected to grow to about $900 billion by 2014, according to the global consultancy and research firm PricewaterhouseCoopers.
Currently more than 80% of the retail industry is concentrated in large metros. The unorganized/ self-employed retail constitutes around 96% of the market. The unorganized retailers are spread across the country and are numbered at around 10 million. The share of organized retail in India is just over 4% as compared to 66% in Japan, 55% in Malaysia, 30% in Indonesia, and 20% in China.
The introduction of FDI in multibrand retail will lead to increased demand, which in turn will catalyse more investment opportunities in organised retail. India may by this year-end decide on allowing FDI investment in multi-brand retail, according to Commerce Secretary Rahul Khullar.
A publication by IndusView Advisors Ltd.